UPS vs NPS: Why Unified Pension Scheme Needs 5 Major Reforms to Compete with NPS

The Indian government introduced the Unified Pension Scheme (UPS) in April 2025 as an alternative to the National Pension System (NPS) for central government employees. While many are debating which is better — UPS or NPS — the real question is: How can UPS become a better and sustainable option for government employees?

Despite the initial deadline of 30 June 2025 for migration from NPS to UPS, the lack of enthusiasm among employees forced the government to extend the deadline to 30 September 2025. Out of 23 lakh eligible employees, only around 10,000 have opted for UPS so far. The reason? UPS, in its current form, lacks several critical benefits that NPS already provides.

Here, we discuss 5 major reforms the government must implement in UPS to make it a viable and attractive alternative.

🔁 1. Increase Government Contribution from 10% to 14%

Currently:

• In NPS, government contributes 14%, employees contribute 10%.
• In UPS, both government and employee contribute 10%.

🧮 This 4% gap may seem small, but over a career of 20–30 years, it compounds into significant corpus difference. To bring UPS on par with NPS:
👉 Government must increase its share to 14%, matching NPS norms.

💰 2. Revise the Lump Sum Formula

Present UPS formula:
Lump Sum = (1/10) × No. of Years of Service × Last Basic Pay (incl. DA)

📉 This results in extremely low retirement benefits. For instance, someone retiring after 30 years with ₹60,000 basic salary receives only ₹5.5 lakh — almost negligible compared to the actual need post-retirement.

Suggested Reform:
➡️ Lump sum should be based on the remaining 40% corpus (if 60% is withdrawn), and must be returned to the nominee in case of death.

This ensures:

• Financial security for family
• Full utilization of employee’s own savings

📊 3. Clear Definition of Benchmark Corpus

Currently:

• UPS uses the term Benchmark Corpus, but no clear definition is given.
• It remains vague and open-ended, unlike the transparent structure of NPS.

Suggested Reform:
👉 Define Benchmark Corpus clearly in absolute numbers or directly relate it to individual accumulated corpus.

This clarity will build employee trust in the system.

🧓 4. Reduce Eligibility for Pension from 25 Years to 20 Years

UPS demands 25 years of service to be eligible for 50% of last drawn basic pension.

In contrast:

• Old Pension Scheme (OPS) allowed pension after 20 years of service.
• Today, many talented employees may wish to switch careers after 20 years.

Suggested Reform:
➡️ Reduce UPS eligibility to 20 years, encouraging flexible career decisions and improving system fairness.

⏳ 5. Immediate Pension After VRS (Voluntary Retirement)

Current UPS flaw:

• If you take VRS before 60 years, pension starts only at age 60.
• For example, if someone retires at 50, there is no pension for 10 years.

⚠️ This is illogical and impractical, especially in today’s world where FIRE (Financial Independence, Retire Early) is a growing trend.

Suggested Reform:
👉 Allow pension to start immediately after VRS, just like in OPS.

This will also help the government by:

• Reducing long-term liabilities
• Opening positions for young talent

📊 UPS vs NPS: A Reformed Comparison (Example)

📌 Final Thoughts

Without these 5 crucial reforms, UPS will continue to be less attractive than NPS. Despite extensions and government promotions, most employees are not migrating to UPS because it fails to match the security, flexibility, and returns that NPS currently offers.

But if the reforms mentioned above are implemented:
✅ UPS could not only match NPS but possibly surpass it in terms of fixed monthly pension, death benefits, and simplicity.

📢 The ball is now in the government’s court.

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